When Harold Wilson’s incoming Labour government prepared itself in 1964 to make good the damage done by “thirteen wasted years” of Tory government, its fate was sealed even as it took office. Fearful of fulfilling a Tory stereotype, the decision was immediately taken to resist a long overdue devaluation of the pound. There followed three years of struggle before yielding to the inevitable; the 1967 devaluation was represented as a defeat, and led inexorably to the loss of the 1970 election.

Labour and the left have always been reluctant to challenge the economic orthodoxy promoted by their opponents and, as a result, have implicitly conceded that the Tories know best – a judgment not surprisingly endorsed, in the absence of arguments to the contrary, by public opinion.

We are at it again. Labour is again advised by its friends that, if we are to win the next election, we must demonstrate that we are ready to perpetuate Tory mistakes by taking the “tough” decisions – for which read imposing yet more cuts and austerity. Anything less, we are assured, will show that we are not ready for government.

So, the search is on to identify the cuts that will show that we too are ready to inflict more pain. But to undertake that search is to disable ourselves from making an effective critique of a Tory economic failure that we seem implicitly to endorse, and to condemn an incoming Labour government to implementing a policy forced upon us by our defeated opponents.

Surely though, as the country’s problems deepen, the decisive action that the voters crave may not be “tough” action that piles on yet more misery, but a clear break from the nostrums that have dominated policy for more than thirty years. Labour’s best chance lies in changing the rules of the game and looking at our problems through a lens that rejects the priorities imposed by a discredited neo-liberal orthodoxy.

We don’t need to look far for the broad outlines and central themes of a clear alternative. The first requirement is to ask the right questions so that our real problems are accurately identified. For example, why do we not seek the growth that, by definition, is essential if we are to escape recession, reduce the government deficit and restore full employment? Because we dare not. And why is that? Because we know that a dash for growth, in light of the parlous state and long-term lack of competitiveness of our productive sector, would immediately be stymied by rising inflation and a worsening trade deficit.

Retrenchment can only compound these problems. If we are to escape the dilemma, it is essential that we address the real obstacles to a growth strategy – the need to rebuild our productive base, in the face of a massive loss of competitiveness and an apparent shortage of liquidity and capital for investment.

In the last three decades, while the rest of the world – China, India, Korea, Brazil, and many others – have become more efficient and competitive as manufacturing economies, we have literally paid no attention to our own declining competitiveness. We have thereby turned our backs on manufacturing, and its unmatched ability to create jobs, stimulate innovation, produce an immediate return on investment and encourage new skills; we decided instead to stake our future on the fool’s gold produced by a financial services industry that – even at best – produced benefits for only a tiny minority.

But, it may be asked, even if we were now to pay attention to improving competitiveness and to understand the vital role of the exchange rate in that undertaking, won’t rebuilding our manufacturing industry cost us money we don’t have? No. As Keynes said, “there are no intrinsic reasons for a scarcity of capital”. There is no shortage of money; it is simply going to the wrong places. The creation of credit by the banks – by far the most important (and virtually unrestrained) element in the growth of the money supply – goes mainly to house purchase; the “quantitative easing” by the Bank of England has gone straight into the banks’ balance sheets. These major sources of new money are cost-free but are not devoted to productive purposes.

We have allowed self-interested bankers to persuade us, in the name of monetarism, that growth in the money supply is a dangerous phenomenon that must always be restricted for fear of inflation; but more successful economies have understood that credit creation directed to productive investment in accordance with an agreed industrial strategy – as the Chinese and Japanese are currently doing – will not be inflationary when it stimulates increased output.

A focus on competitiveness and on ensuring an ample supply of investment capital for productive purposes means that our successful competitors can make full use of their productive capacity. We, on the other hand, are happy to tolerate a high rate of unemployment, with all that means for lost productive capacity and social dislocation.

A Labour commitment to make full employment the central goal of policy – a goal for which responsibility could not be shuffled off on to unaccountable bankers but would be the issue by which a Labour government wished to be judged – would be welcomed as a decisive break with the neo-liberal era. Full employment, after all, is the hallmark of a properly functioning economy; there is nothing economically efficient about keeping people out of work.

The fainthearted should be reassured. This approach to economic policy is tried and tested; it has been successfully deployed by other more successful economies over a long period. It is just that we have been too arrogant to notice.

Bryan Gould

29 May 2013

This article was published in Comment Is Free, The Guardian, on 30 May